Volume Weighted Average Divergence

The Volume Weighted Average Divergence indicator is a momentum-based oscillator that compares the differences between volume-weighted and simple moving averages to identify shifts in market sentiment and trend strength. By isolating the impact of volume on price movement relative to a standard mean, it provides traders with a clearer view of whether price action is supported by significant trading activity.

Usage

The indicator can be used to identify trend direction, momentum shifts, and potential reversals through several visual components:

• VWAD Line: This line represents the mean value between two separate volume/price divergences. When the line is above the zero center line and colored green, it suggests bullish momentum. Conversely, when it is below zero and colored red, it suggests bearish momentum.
• Histogram: The histogram measures the rate of change in the divergence. It helps traders identify accelerating or decelerating momentum. A bright green or red histogram bar indicates strong momentum in that direction, while darker shades suggest a potential cooling off.
• Center Line Crosses: Transitions above or below the zero level can be used as signals for trend changes.
• Bar Colors: The script includes custom bar coloring that reflects the state of the VWAD line, allowing users to monitor momentum directly on their price candles.

Details

The Volume Weighted Average Divergence (VWAD) is built upon the concept of calculating the distance between a Volume Weighted Moving Average (VWMA) and a Simple Moving Average (SMA) over two different lookback periods.

The logic follows these steps:

1. Calculate the difference (divergence) between the VWMA and SMA for "Lookback 1".
2. Calculate the difference (divergence) between the VWMA and SMA for "Lookback 2".
3. The VWAD Line is the average of these two differences.
4. The Histogram is derived by taking the difference between the two divergences and subtracting an Exponential Moving Average (EMA) of that difference. This creates an oscillator that highlights the "spread" between short and long-term volume-price relationships.

Settings

• Source: Determines the price data used for all moving average calculations (default is HLC3).
• Lookback 1: Sets the period for the first set of VWMA and SMA calculations.
• Lookback 2: Sets the period for the second set of VWMA and SMA calculations.
• Histogram Smoothing Period: Adjusts the EMA length used to calculate the histogram, affecting how sensitive the histogram is to price changes.

FAQ

How do I interpret the histogram colors?

Bright colors indicate that momentum is both in the direction of the trend and increasing (moving further from zero). Darker colors indicate that while the trend direction remains the same, the momentum is beginning to weaken or mean-revert.

What does it mean when the VWAD line crosses zero?

A zero-cross suggests that the relationship between volume-weighted price and the simple average price has flipped. Crossing above zero typically indicates that price is rising on higher relative volume, while crossing below indicates price is falling on higher relative volume.

How can I access Volume Weighted Average Divergence?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.